The Importance of Residential Ties for Canadian Tax Purposes
The discussion that follows reviews the importance of residence in taxation issues concerning Canada. As you may be aware, Canada's tax system is based upon the "ordinary residence" of an individual, while the United States bases its system on citizenship (and legal residence). That means that in order not to be considered taxable in Canada you must not maintain residential ties with Canada.
In the matter of the residence question, please read and take note of the following information that bears on the question of residence. If you would like further explanation of any of this material, please contact us. According to Revenue Canada Views, released in 1993,
"The meaning or interpretation of the term "resident" or "residence" is not defined in the Income Tax Act. For Canadian income tax purposes the matter of residence, excluding certain deeming provisions under the Income Tax Act (e.g. individuals who sojourn in Canada for 183 days or more in a calendar year are deemed to be resident in Canada throughout the entire year), is a question of fact. The Canadian court system has held that an individual is resident in the place where he, in the settled routine of his life, regularly, normally or customarily lives. That quality is chiefly a matter of the degree to which a person in mind and fact settles into or maintains or centralizes his ordinary mode of living. While the following list does not purport to be exhaustive, material factors include:
- there must be a degree of permanence to absence from Canada
- return to Canada foreseen at time of departure
- guaranteed employment upon return to Canada
- status with Employment and Immigration Canada
- dwelling place (or places)
- spouse and dependents
- friends and family
- personal property (furniture, automobile, clothing, etc.)
- economic ties (employment, union membership, business, investments)
- financial services (bank accounts, credit cards, safety
- social ties (membership in professional, social, recreational, or religious organizations)
- provincial and private medical coverage
- social security coverage
- driver's licenses
- telephone listings
- subscriptions to newspapers and other periodicals
- Canadian burial plots
- everyone must be resident somewhere
- it is possible to be a dual resident
- status generally not affected by occasional return visits to Canada
- return visits on a regular basis may indicate a continuing resident"
The following is an excerpt from Revenue Canada's Interpretation Bulletin IT-221R2 — "Determination of an Individual's Residence Status, Date: February 25, 1983, Reference: Section 2 (also sections 48, 114, 115, 212 and 250):
*This bulletin replaces and cancels IT-221R dated May 26, 1980 and is applicable to individuals leaving Canada after May 26, 1980 except for those individuals who are deemed by section 250 to have been resident in Canada throughout a taxation year in which case the bulletin applies for the 1980 and subsequent taxation years. The Department's position with respect to individuals leaving Canada on or prior to that date is outlined in IT-221 dated May 26, 1975. The comments in IT-221 will also continue to apply where an employee leaves Canada after May 26, 1980 to fulfill a written contract entered into by his employer prior to July 24, 1979 to provide services outside Canada. Current revisions are designated by vertical lines.
The purpose of this bulletin is to explain the Department's position concerning the determination of an individual's residence status for income tax purposes.
The term "resident" is not defined in the Income Tax Act. The Courts have held that an individual is resident in Canada for tax purposes if Canada is the place where he or she, in the settled routine of his or her life, regularly, normally or customarily lives. In making this determination, all of the relevant facts in each case must be considered.
Where an individual leaves Canada after May 26, 1980, the following factors will be taken into consideration in determining whether or not the individual will remain a resident of Canada for tax purposes while abroad:
- permanence and purpose of stay abroad,
- residential ties within Canada,
- residential ties elsewhere, and
- regularity and length of visits to Canada.
Permanence and Purpose of Stay Abroad
In order for an individual to become a non-resident of Canada, there must be a degree of permanence to his or her stay abroad. Where a Canadian resident is absent from Canada (for whatever reason) for less than 2 years, he or she will be presumed to have retained his or her residence status while abroad, unless he or she can clearly establish that he or she severed all residential ties on leaving Canada. If there is evidence that his or her return to Canada was foreseen at the time of his or her departure (e.g. a contract for employment upon return to Canada), the Department will presume that he or she did not sever all residential ties on leaving Canada.
Where an individual is absent from Canada for 2 years or longer, he or she will be presumed to have become a non-resident of Canada, provided that he or she satisfies the other requirements for non-resident status outlined in 6 to 12 below.
Residential Ties Within Canada
The primary residential ties of an individual are his or her
- dwelling place (or places),
- spouse and dependents, and
- personal property and social ties.
An individual who leaves Canada, but ensures that a dwelling place suitable for year-round occupancy is kept available in Canada for his or her occupation by maintaining it (vacant or otherwise), by leasing it at non-arm's length, or by leasing it at arm's length with the right to terminate the lease on short notice (less than 3 months) will generally be considered not to have severed his or her residential ties within Canada.
If a married individual leaves Canada, but his or her spouse or dependents remain in Canada, the individual will generally be considered to remain a resident of Canada during his absence. An exception to this may occur where an individual and his or her spouse are legally separated and the individual has permanently severed all other residential ties within Canada. The residential ties of a single person are frequently of a more tenuous nature and, in the majority of cases, if such a person leaves Canada for 2 years or more and establishes a residence elsewhere, it is likely that he or she will be a non-resident of Canada during his absence, unless other important ties within Canada indicate that he or she is not. For example, where a single person is supporting someone in a dwelling maintained and occupied by him in Canada and, after his departure, he continues to support that person in the dwelling, he or she will not be considered to have severed his or her residential ties within Canada.
Generally speaking, an individual who leaves Canada and becomes a non-resident will not retain any residential ties in the form of personal property (e.g. furniture, clothing, automobile, bank accounts, credit cards, etc.) or social ties (e.g. resident club memberships, etc) within Canada after his or her departure. Where such ties are retained within Canada, the Department may examine the reasons for their retention to determine if these ties are significant enough to conclude that the individual is a continuing resident of Canada while absent. Other ties that may also be relevant in this determination are the retention of:
- provincial hospitalization and medical insurance coverage,
- a seasonal residence in Canada,
- professional or other memberships in Canada (on a resident basis), and
- family allowance payments.
Residential Ties Elsewhere
The Courts have held that
- everyone must be resident somewhere, and
- it is quite possible for an individual to be resident in more than one place at the same time for tax purposes. Accordingly, where a resident of Canada goes abroad, but does not establish a permanent residence elsewhere, there is a presumption that he or she remains a resident of Canada. Also, the fact that an individual establishes a permanent residence abroad does not, in and by itself, mean that the individual has become a non-resident of Canada.
Where an individual is resident in Canada and, at the same time, resident in another country by its laws, reference should be had to any tax convention or agreement that Canada may have with the other country.
Regularity and Length of Visits to Canada Where an individual leaves Canada and purports to become a non-resident, his or her tax status as a non-resident will not generally be affected by occasional return visits to Canada, whether for personal or business reasons. However, where such visits are more than occasional, particularly where the visits occur on a regular basis, this factor together with other residential ties that exist (as set out in 9 above) will be examined to determine whether they are significant enough in total to conclude that the individual is a continuing resident of Canada.
Date Non-Resident Status Acquired
The date on which a Canadian resident leaving Canada becomes a non-resident for tax purposes is generally the latest of the dates on which
- he or she leaves Canada,
- his or her spouse and/or dependents leave Canada (if applicable), or
- he or she becomes a resident of the country to which he is immigrating.
An exception to this will occur where the individual was resident in another country prior to entering Canada and he or she is leaving to re-establish his or her residence in that country. In this case, the individual will generally become a non-resident on the date he or she leaves Canada; even if, for example, his or her spouse remains temporarily behind in Canada to dispose of their dwelling place in Canada.
The comments in this bulletin are intended only for the guidance of persons leaving Canada under ordinary circumstances. In cases where one of the main purposes of a person's absence from Canada is to avoid Canadian income taxes which would otherwise be payable, regard may be had to other factors."
On the basis of the foregoing, to meet the definition of "non resident", you should ensure that in particular you have:
- sent back your OHIP or other Canadian Health Insurance card;
- disposed of your Canadian drivers license; obtain U.S. drivers license;
- notified all banks and others with whom you have personal financial dealings in Canada that you are a non resident and that withholding taxes will apply;
- file all Canadian returns as non residents;
- acquire U.S. health insurance coverage;
- spend most of each year in the U.S.;
- quit membership in all clubs in Canada;
- sever other ties with Canada, which could be used to deem you a resident.
Although the information presented above is by no means conclusive or complete, it should serve as a starting point in the understanding of residence as defined in the context of Canadian tax laws. Please contact us if you require any further information or assistance with the foregoing.